Lepore vs. Christensen: Was U.S. Steel Disrupted, Or Did It Evolve?

America has plenty of scrap metal lying around, and mini-mills worked out how to turn it into new steel, cheaply.

Jeff Swensen for The Wall Street Journal

U.S. Steel Corp. has emerged as an unlikely proxy in a heated debate over the notion of disruptive innovation between Harvard historian Jill Lepore and Harvard Business School professor Clayton Christensen.

She says patterns, and the evolution of history itself, are more unpredictable, and accuses Mr. Christensen of faulty logic and cherry-picking his example businesses like floppy drives and online education.

And U.S. Steel.

The 113-year-old Pittsburgh firm has been challenged since the 1980s by competition from so-called mini-mills, which make steel from scrap metal in electric arc furnaces, instead of from iron ore and coal in blast furnaces. No new blast furnace mill has been built in the U.S. since the 1960s.

But Ms. Lepore says U.S. Steel’s labor issues were just as important as mini-mills in the company’s challenges:

Christensen tends to ignore factors that don’t support his theory. Factors having effects on both production and profitability that Christensen does not mention are that, between 1986 and 1987, twenty-two thousand workers at U.S. Steel did not go to work, as part of a labor action, and that U.S. Steel’s workers are unionized and have been for generations, while minimill manufacturers, with their newer workforces, are generally non-union. Christensen’s logic here seems to be that the industry’s labor arrangements can have played no role in U.S. Steel’s struggles—and are not even worth mentioning—because U.S. Steel’s struggles must be a function of its having failed to build minimills. U.S. Steel’s struggles have been and remain grave, but its failure is by no means a matter of historical record. Today, the largest U.S. producer of steel is—U.S. Steel.

[Disruptive innovation] is not a theory about survivability. I’d ask [Lepore] to go see an integrated steel company operated by U.S. Steel. Seriously. And come back with data on, does U.S. Steel make rebar anymore? No, they’ve been taken out of rebar. Do the integrated steel companies like U.S. Steel make rail for the railroads? No. Do they make rod and angle iron, Jill? No. Do they make structural steel I-beams and H-beams that you use to make the massive skyscrapers downtown, does U.S. Steel make those beams?

Mr. Christensen and his assistant did not return emails seeking comment.

So who’s right?

It’s a fact that mini-mill companies like Charlotte-based Nucor Corp., have taken over much of the market for steel used in projects like buildings and rail tracks, and for other products such as shelves, factory machines and refrigerators. And they can operate in those markets profitably, thanks to the lower costs in their business, both of furnace infrastructure and non-union labor.

Around two-thirds of American steel is currently made in electric arc furnaces, up from one-tenth 40 years ago, says Tom Danjczek of the Steel Manufacturers Association.

But U.S. Steel is still a very important player in the market for high quality steel needed in industries like energy and auto manufacturing, and those high-quality products also command higher prices. Of the $1.2 billion in operating income the company generated in 2012 and 2013, 44% came from the company’s energy-centric pipe and tube business, and 40% from the hot-rolled coil unit, which is geared toward the auto industry.

Courtney Boone, a spokeswoman for U.S. Steel, points out the company still makes steel roofing and construction materials. “We are in high-value add markets where we provide high-value add materials,” she adds. “And we chose to get out of markets that were not profitable.”

One reason those markets aren’t profitable for U.S. Steel, of course, is that mini-mills figured out a way to serve them at a much lower cost, eating away at what had been healthy margins for U.S. Steel. But many other factors have also been at play, including the inflation of health care costs in the U.S. and competition from lower-priced imports emanating everywhere from Japan to Mexico.

Mr. Danjczek of the Steel Manufacturers Association, says he “wouldn’t use the word ‘disrupted’”to describe what mini-mills did to U.S. Steel and other old-school steelmakers. Instead, the 66-year-old former steelworker and plant manager describes an evolution within the same business.

“I converted to mini-mills because they figured out a way to dramatically reduce the cost of making steel from iron units,” he said. Mini-mills “are one-third the capital costs, and we have a tremendous amount of scrap available in the U.S.” In addition, “you can run mini-mills 80 percent of the time, which is desirable for a cyclical business.”

U.S. Steel and others “do have a point” about blast furnaces being capable of producing higher quality steel at lower costs, says Mr. Danjczek. One-tenth of high-quality steel products, such as “the skin of an automobile” can only be made affordably in old-fashioned furnaces, where alloy ingredients can be more carefully controlled.

U.S. Steel, as Mrs. Lepore points out, still makes more steel than any other U.S.-based firm, but a huge writedown contributed to its $1.7 billion loss in 2013. The company is going through a major restructuring that CEO Mario Longhi calls the Carnegie Way, after one of the company’s progenitors, Andrew Carnegie, who died in 1919.

Comments (5 of 109)

Stick with consumer staples. Commodities are like log rhythmic functions. If Mrs. Hill is not there to assist you, you may make a critical mistake. Oil has been a safe haven for centuries. BP catastrophe is mostly resolved. Buy some Exxon Mobil and enjoy the ride.

8:28 pm September 3, 2014

Kelly wrote:

I will admit that my short position was foolish. I was going to upgrade to a fascinating modern day mansion. When I went all in short, my timing was wrong and the specialist crushed me. Remember - Time, information, and power. The specialist has the power. Please get the timing right for all you Shorter-s. You can get that mansion, you can get that Ferrari- Just time the Short Trade right. Spread the short position over time. Zero growth, next to zero dividend, poor revenues, poor management, lousy section of the country. This is a no brainer, the timing is the required engineering. I am okay without the mansion. I have a beautiful puppy and a gorgeous green bird. Happy Trading!

7:35 pm September 3, 2014

Bruce wrote:

There has been clarity on what would happen after the release of Steel's earnings on July 29, 2014. Almost to a tee; the predictable trading pattern taking the stock up to close to $40.00 a share has occurred. Okay, All Right! now take profits on the down side. This issue has no where to go except South like a heavy lead weight being dropped into the Indian Ocean. Watch the pattern as the Specialist starts to panic; as there are going to be no more interested purchasers. No one consistently pursues garbage, aside from the recycling sector. A seven to ten dollar drop should occur sooner then most would imagine. At least there was a little bit of a show for the preceding five week period. SELL QUICKLY HEAD FOR THE EXIT!

9:32 am August 28, 2014

Slim wrote:

Matt is not thinking straight. Matt is not on top of the real situation involved in understanding how today's media works. I understand that we have the right to free speech. Matt if you are going to make comments like the ones you did regarding this article then I would suggest that you sign up for some classes on human reform, human dignity, management streamlining, basic psycology, human behavior, and journalism. Several good American's reading a well put together article had issues with your comments.

7:19 pm August 15, 2014

Ryan S. wrote:

If this issue doesn't retrace I am thinking a show that has aired for more than two decades might have a new host.